arens14e ch06 ppt ge
TRANSCRIPT
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Audit ResponsibilitiesAudit Responsibilitiesand Objectivesand Objectives
Chapter 6Chapter 6
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Learning Objective 1Learning Objective 1
Explain the objective of conducting an Explain the objective of conducting an audit of financial statements and an audit of financial statements and an audit of internal controls.audit of internal controls.
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Objective of Conducting an Objective of Conducting an Audit of Financial Audit of Financial
StatementsStatementsThe purpose of an audit is to provide financialstatement users with an opinion by the auditoron whether the financial statements are presented fairly, in all material respects, inaccordance with applicable financial accounting framework.
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Steps to Develop Audit Steps to Develop Audit Objectives Objectives
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Learning Objective 2Learning Objective 2
Distinguish management’s Distinguish management’s responsibility for the financial responsibility for the financial statements and internal control from statements and internal control from the auditor’s responsibility for the auditor’s responsibility for verifying the financial statements verifying the financial statements and effectiveness of internal control.and effectiveness of internal control.
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Management’s Management’s ResponsibilitiesResponsibilities
Financial statements and internal controls.
Sarbanes-Oxley increases management’sresponsibility for the financial statements.
CEO and CFO must certify quarterly and annualfinancial statements submitted to the SEC.
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Management’s Management’s ResponsibilitiesResponsibilities
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Management’s Management’s ResponsibilitiesResponsibilities
The Sarbanes-Oxley Act provides for criminalpenalties for anyone who knowingly falselycertifies the statements.
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Learning Objective 3Learning Objective 3
Explain the auditor’s responsibility for Explain the auditor’s responsibility for discovering material misstatements.discovering material misstatements.
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Objectives of the AuditorObjectives of the AuditorObtain
reasonable assurance
Free from material
misstatementsFinancial
statements
Opine Applicable reporting framework
Financial statements
Report Communicate
per audit standards
Financial statements
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Professional Skepticism
Material misstatements
Errors vs. Fraud
Reasonable Assurance
Auditor’s ResponsibilitiesAuditor’s Responsibilities
Fraudulent reporting
vs. theft of assets
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Auditor’s Responsibilities for Auditor’s Responsibilities for Discovering Illegal ActsDiscovering Illegal Acts
Direct-Effect Same for
errors and fraud
Indirect-Effect No Assurance
Type Responsibility
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Auditor’s Responsibilities for Auditor’s Responsibilities for Discovering Illegal ActsDiscovering Illegal Acts
Auditor suspects Inquire of managementConsult client’s counsel or specialistConsider accumulating evidence
Auditor knowsConsider effects on financial statementsConsider effect on relationship with managementCommunicate with audit committee or equivalent
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Learning Objective 4Learning Objective 4
Classify transactions and account Classify transactions and account balances into financial statement balances into financial statement cycles and identify benefits of a cycle cycles and identify benefits of a cycle approach to segmenting the audit.approach to segmenting the audit.
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Financial Statements CyclesFinancial Statements Cycles
Audits are performed by dividing the financialstatements into smaller segments or components.
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Transaction Flow ExampleTransaction Flow Example
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Relationships Among Relationships Among Transaction CyclesTransaction Cycles
Generalcash
Capital acquisitionand repayment cycle
Sales andcollection
cycleAcquisition
and paymentcycle
Payroll andpersonnel
cycle
Inventory andwarehousing
cycle
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Learning Objective 5Learning Objective 5
Describe why the auditor obtains a Describe why the auditor obtains a combination of assurance by auditing combination of assurance by auditing classes of transactions and ending classes of transactions and ending balances in accounts, including balances in accounts, including presentation and disclosure.presentation and disclosure.
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Balance and Transactions Balance and Transactions Affecting Balances ExampleAffecting Balances Example
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Learning Objective 6Learning Objective 6
Distinguish among the three Distinguish among the three categories of management categories of management assertions about financial assertions about financial information.information.
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Management AssertionsManagement Assertions
1. Assertions about classes of transactions andevents for the period under audit
2. Assertions about account balances at period end
3. Assertions about presentation and disclosure
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Management Assertions forManagement Assertions forEach Category of AssertionsEach Category of Assertions
Transactions and Events
Account Balances
Presentation and DisclosureOccurrence Existence Occurrence and rights
and obligationsCompleteness Completeness Completeness
Accuracy Valuation andallocation
Accuracy andvaluation
Classification Classification andunderstandability
CutoffRights andobligations
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PCAOB AssertionsPCAOB AssertionsExistence or Occurrence
Completeness
Rights and obligations
Presentation and disclosure
Valuation orallocation
Similar to U.S. GAAS as the first four assertions are applicable to balances and transactions. Presentation is treated as a single assertion
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Learning Objective 7Learning Objective 7
Link the six general transaction-related Link the six general transaction-related audit objectives to management audit objectives to management assertions for classes of transactions.assertions for classes of transactions.
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Occurrence Recorded transactionsexist
Completeness Existing transactionsare recorded
AccuracyRecorded transactionsare stated at thecorrect amounts
General Transaction-related General Transaction-related Audit ObjectivesAudit Objectives
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Classification Transactions are properlyclassified.
Timing Transactions are recordedon the correct dates.
Posting andsummarization
Transactions are includedin the master files andare correctly summarized.
General Transaction-related General Transaction-related Audit ObjectivesAudit Objectives
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Hillsburg Hardware Co.Hillsburg Hardware Co.(Applied to Sales Transactions)
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Learning Objective 8Learning Objective 8
Link the eight general balance-related Link the eight general balance-related audit objectives to management audit objectives to management assertions for account balances.assertions for account balances.
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Existence Amounts included exist
Completeness Existing amounts areincluded
AccuracyAmounts included arestated at the correctamounts
General Balance-relatedGeneral Balance-relatedAudit ObjectivesAudit Objectives
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Classification Amounts are properlyclassified
Cutoff Transactions are recordedin the proper period
Detail tie-inAccount balances agreewith master file amounts,and with the general ledger
General Balance-relatedGeneral Balance-relatedAudit ObjectivesAudit Objectives
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Realizablevalue
Assets are included atestimated realizable value
Rights andobligations Assets must be owned
General Balance-relatedGeneral Balance-relatedAudit ObjectivesAudit Objectives
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(Applied to Inventory)Hillsburg Hardware Co.Hillsburg Hardware Co.
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Learning Objective 9Learning Objective 9Link the four presentation- and Link the four presentation- and
disclosure-related audit objectives to disclosure-related audit objectives to management assertions for management assertions for presentation and disclosure.presentation and disclosure.
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(Applied to Notes Payable)Hillsburg Hardware Co.Hillsburg Hardware Co.
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Learning Objective 10Learning Objective 10
Explain the relationship between audit Explain the relationship between audit objectives and the accumulation of objectives and the accumulation of audit evidence.audit evidence.
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How Audit Objectives Are How Audit Objectives Are MetMet
The auditor must obtain sufficient appropriateaudit evidence to support all managementassertions in the financial statements.
An audit process has four specific phases
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Four Phases of a Financial Four Phases of a Financial Statement AuditStatement Audit
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End of Chapter 6End of Chapter 6